The Indian bond market closed another eventful session this week, with yields surging to 7.25 per cent before cooling down a bit as new official data showed inflation climbed to 7.44 per cent in July, thanks to rising food prices as El Nino monsoon rain wreaks havoc across the country.
India’s retail inflation is currently higher than the Reserve Bank of India’s (RBI) tolerance band of 2-6 per cent. This comes as the irregular El Nino monsoon has led to a spike in food prices.
Says Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, a financial advisory firm: Upon higher inflation figures, the 10-year government bond yield surged up to 7.25 per cent during the week before cooling down to 7.21 per cent on Friday. The new 10-year G-Sec is trading at a discount and closed at around 7.20 per cent.”
The money market yields have also spiked, he says, because of reduced system liquidity due to the incremental cash reserve ratio (I-CRR) and inflationary pressure.
“We expect both CP (commercial paper) and CD (certificate of deposit) issuers may step up their borrowings in the coming days. Without any positive trigger, the bond market is expected to trade within a range next week’” adds Srinivasan.
Meanwhile, on Friday, RBI announced another weekly auction of Treasury bills (T-bills) and state development loans (SDLs). The indicative T-bill yields for three-month, six-month, and 354-day are 6.83 per cent, 7.01 per cent, and 7.03 per cent, respectively.
In the SDL auction, seven states have announced their participation—Goa, Assam, Andhra Pradesh, Kerala, Bihar, Mizoram, and Uttar Pradesh (UP). UP and Kerala are offering the highest interest rates at 7.53 per cent for SDLs maturing in 2034 and 2037, respectively.
Rockfort data shows that the state governments expect to sell SDLs worth Rs 8,430 crore on August 22, as against the scheduled market borrowing of Rs 17,350 crore.
Corporate Bond Market Updates:
A number of issuers have tapped the market during the week, including REC for Rs 2,210 crore and India Grid Trust for Rs 1,650 crore. Next week, Delhi International Airport also plans to tap the bond/NCD market, as per Rockfort.
Meanwhile, the PSU entities and banks are expected to continue their borrowing through the bond market. The much-hyped AP State Beverages Corporation postponed its planned borrowing last week.
In a consultation paper, the Securities and Exchange Board of India (Sebi) is seeking comments by August 31, 2023, as it looks to review the existing framework for mandatory borrowing by large corporates to deepen the bond market.